2017-18 ANNUAL REPORT ABN 97 010 721 749 Cellnet Group Limited 59-61 Qantas Drive, Eagle Farm, QLD 4009 Australia t: 1300 255 563 www.cellnet.com.au CHAIRMAN’S REPORT The Directors have pleasure in presenting the results of the company which consistently show improvement. Turnover increased by 5.8% and profit from operations increased by 55.6% year on year. Net profit from operations amounted to $3.1m or 5.6c per share (2017 - $2m or 3.9c per share). The company has recognised a deferred tax asset resulting from tax timing differences on the valuation of inventory for which a tax benefit of $2.8m has been taken to account. The resulting net profit attributable to shareholders amounted to $5.9m for the year. The company’s balance sheet has strengthened to show low net cash borrowings of $0.15m (2017: $4.8m) and a Net Tangible Asset Value of 32c per share (2017: 28.1c). As the partner to many of the world’s premier brands, Cellnet has continued to consolidate its position as the leading distributor for mobility accessories in the Australian and New Zealand marketplace with strong contractual relationships with leading Telcos, Consumer Electronic Retailers and specialty stores across the region. Our Category Management approach has differentiated Cellnet from its competitors and is assisting our customers improve their profitability and end user offering. We remain well poised to grow via acquisition and the board will continue to evaluate opportunities which align with the company’s strategy. A partially franked dividend of 1.25 cents per share was paid in September 2017 and the Board has declared an unfranked final dividend of 1.25 cents per share for the 2018 financial year. Michael Wendt Chairman, Cellnet Group Limited Page 1 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 2017-18 BY NUMBERS 15NEW BRANDS R$18M GROWTH YOY (AU)45% E V O IN AUDIO PRODUCTS 1,715,130 SMARTPHONE CASES SHIPPED ACROSS ANZ UNDERLYING OPERATIONAL PROFIT 173,113 ORDERS PLACED AND SHIPPED WORLDWIDE L I M $ FY14 FY15 FY16 FY17 FY18 Page 2 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 x3 SALES L I M $ 300%ASP IN TELCO THROUGH BETTER CATEGORY MANAGEMENT GROWTH DECLARED DIVIDENDS S T N E C FY14 FY15 FY16 FY17 FY18 NEW CUSTOMERS 1,244 NEW PRODUCTS Page 3 FY14 FY15 FY16 FY17 FY18 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 PROACTIVE ENGAGED MOTIVATED STRATEGIC PLANNING TO MAXIMISE RESULTS PLATFORM BUILDING FOR FUTURE SET-UP RE-INVEST IN PEOPLE, TRAINING, PROCESSES AND TOOLS HARNESS THE GROWTH PHASE Page 4 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 EMBRACE E-COMMERCE OPPORTUNITIES CONTINUE TO TAKE AUSTRALIA’S LEADING ACCESSORIES BRAND GLOBAL STRATEGIC INVESTMENTS WITH WENTRONIC ASIA PACIFIC LEVERAGE SYNERGIES WITH WENTRONIC INNOVATE CHANNELS CATEGORIES, AND SUPPLY CHAIN CONTINUE TO BE THE CATMAN LEADER IN TELCO Page 5 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 A FOUNDATION FOR SUCCESS Our Brands Our Expertise Channel Partnerships Product Innovation Trend spotting Category Management Retail Space Management Business Intelligence Vendor Managed Inventory Attachment & Product Training Scale Mobile/Tablet Accessories Market Focus Page 7 Our Brand Partners Cellnet Group Limited and its consolidated entities Annual Report 2017–18 GIVING BACK WITH ASPIRATIONS4KIDS IN SPORT IN NOVEMBER 2017, ASPIRATIONS4KIDS IN SPORT WELCOMED CELLNET AS ITS NEWEST CORPORATE PARTNER. At A4K our constant goal is to partner with organisations that value the important role that participation in sport can play in improving the lives of thousands of Queensland students annually. Ian Healy Chair - Aspirations4Kids in Sport Ltd Clearly, Cellnet has a community conscience and share our dream to assist more kids and families facing hardship, disabilities, chronic illness and remote living issues. This is evidenced by the wonderful support shown for A4K fund raising initiatives as together we share the hope that no-one misses out on playing sport due to unique or extenuating circumstances. Our gratitude for Cellnet’s contributions include corporate donations and staff workplace giving, to volunteering time to assist A4K with introductions to prospective corporate partners, graphic design production and attendance at events towards optimising guest experiences. Due to these valuable contributions, A4K has been able to assist in excess of 150 kids and their families. On a daily basis these kids face life challenges with a tenacity and resilience you simply can’t teach. A love of sport is their common bond and the catalyst for enhancing their lives. I would like to take this opportunity to sincerely thank Alan Sparks, Brett Perkins and all the Cellnet staff for believing in our organisation’s work and assisting A4K in so many valuable ways. We look forward to continuing this very important association. Yours In Sport, Ian Healy Chair – Aspirations4Kids in Sport Ltd Page 8 2018 A4K Scholarship Holder Poppy Richards Poppy faces multiple life challenges due to the effects of Cerebral Palsy (Left Hemiplegia) and Periventricular leukomalacia (PVL) resulting from premature birth and pre-eclampsia during her mother’s pregnancy. A calf surgery due to a combination of moderate pain, an uneven gait and balance issues has added another layer of complexity to Poppy’s sports’ career, however this is somewhat off-set by enhanced levels of self-esteem and confidence derived from sport that affords her the drive to progress and keep doing the things she loves. A4K funding has assisted Poppy to attend the National Schools Cross Country Titles in Hobart. In 2018 Poppy was awarded an A4K Scholarship, which will assist with training fees, gear and special equipment purchases and travel to swimming, running and life-saving events. Poppy dreams of being able to mentor other kids with disabilities. We thank Cellnet for assisting A4K to support Poppy and other kids like her. Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Cellnet Meet the Crusaders Afternoon On Thursday 8 February, Cellnet created the opportunity for some of our A4K rugby recipients to meet the champion Canterbury Crusaders Rugby team. The team were in Brisbane for the Global 10s (9th and 10th Feb. Suncorp Stadium) and trained at the Springfield Hawkes, The Lakes Oval, Brisbane prior to the tournament. A4K recipients watched the Crusaders train and were lucky enough to join in a coaching session with other junior players from the Springfield Hawks. “I had the best time and the players were really great, thanks to Cellnet for making this opportunity possible.” Kelvyn Togia South Coast School Sport Region Celebration of the Games Function - presented by Cellnet In April 2018, the Gold Coast played host to the 21st Commonwealth Games and one week prior A4K hosted 160 guests at the magnificent QT Hotel. Special guests included legends Susie O’Neill, Steph Rice, Nikki Hudson, who were also joined by Australian representatives Fiona Cullen, Alex Hartmann, Lakeisha Patterson, Brenden Hall and Chris and Mel Wright (nee Schlanger). The day featured touching messages from A4K Ambassador and swimming champion Cate Campbell and A4K recipients Paige Leonhardt and Kyle Potgeiter. Along with 800m debutant Joseph Deng, Paige competed in their first Commonwealth Games. Both athletes acquitted themselves very well with Paige winning a Silver para-medal at the games. Cellnet contributed to the day taking a table, providing great raffle prizes and were the presentation partners for the day. Proceeds from the function supported 35+ A4K families. Aspirations4Kids In Sport / Cystic Fibrosis - Inaugural Walking with Legends Golf Day In May 2018, A4K partnered with Cystic Fibrosis Queensland and presented the Walking with Legends Golf Day at the magnificent Brisbane Golf Club. A big field of 130 players teed off in prefect conditions, enjoyed a round of golf with sporting legends and rounded the day out with a beautiful two course meal and presentation dinner where the Patterson / Hall Cup was presented to the inaugural winners. Funds from the day support both A4K causes and CFQs Bounce2Breath program. Cellnet offered fantastic support for the day taking two teams and providing great raffle prizes. This golf day will be an annual event. Proceeds from the day supported 50+ A4K families. Page 9 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Page 10 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Contents Corporate information .............................................. 13 13 Non-current assets – Directors’ Report Financial Report 13 27 Statement of financial position ................................ 28 Statement of comprehensive income ......................... 29 Statement of changes in equity ................................. 30 property, plant and equipment ....................... 50 14 Non-current assets – intangibles .................... 51 15 Current liabilities – trade and other payables ............................... 51 16 Provisions .................................................... 51 17 Current liabilities – Statement of cash flows ........................................... 31 interest bearing loans and borrowings ........... 51 Notes to the financial statements ............................... 32 18 Derivative financial instruments ..................... 52 1 Corporate information .................................... 32 19 Contributed equity and reserves ..................... 52 2 Significant accounting policies ...................... 32 20 Share based payments .................................. 53 3 Financial risk management objectives and policies ................................ 42 4 Fair value measurement ................................ 45 5 Operating segments ...................................... 46 6 Other revenue ............................................... 46 7 Items included in profit/(loss) ........................ 46 8 Income tax .................................................... 47 9 Earnings per share ........................................ 48 10 Current assets – cash and cash equivalents ........................... 49 11 Current assets – 21 Commitments and contingencies .................... 58 22 Financial guarantees ..................................... 58 23 Related party disclosure ................................ 58 24 Key management personnel .......................... 59 25 Subsequent events ........................................ 59 26 Parent entity information .............................. 59 27 Auditors’ remuneration ................................. 60 28 Dividends franking account ........................... 60 29 Cash flow statement reconciliation ................ 61 trade and other receivables ........................... 49 Directors’ declaration ............................................... 62 12 Current assets – inventories .......................... 50 Independent auditors’ report ..................................... 63 ASX Additional Information ....................................... 67 Page 11 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Page 12 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 DIRECTORS’ REPORT Corporate Information Directors M. Wendt (Chairman) A. Sparks B. Danos K. Gilmore M. Reddie Company Secretary C. Barnes Principal Registered Office Cellnet Group Limited 59-61 Qantas Drive Eagle Farm QLD 4009 Phone: 1300 255 563 Fax: 1800 255 563 Banker Westpac Banking Corporation 260 Queen Street Brisbane QLD 4000 Auditor Pitcher Partners 345 Queen Street Brisbane QLD 4000 Share Register Link Market Services Ltd Level 21, 10 Eagle Street Brisbane QLD 4000 Phone: 1300 554 474 Solicitors Reddie Lawyers Level 2, 710 Collins Street Docklands VIC 3008 Securities Exchange The Company is listed on the Australian Securities Exchange. The Home exchange is Brisbane. Corporate Governance All corporate governance related matters and associated disclosures regarding the company, including the company’s corporate governance statement, can be found on the company’s website in the investor relations section at: www.cellnet.com.au/investorrelations Page 13 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 DIRECTORS’ REPORT Your Directors submit their report for the year ended 30 June 2018. Directors The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. Wentronic’s offices in China in all sourcing and logistical operations. Prior to his appointment to his current role Mr Danos held the position of Director of Marketing and Sales with A&L International Holdings Limited, a Hong Kong based private label manufacturer. He has also held senior positions with Philips Consumer Electronic Accessories in both Europe and the USA. Mr Danos is currently a member of the Remuneration and Strategy Committees. Names, qualifications, experience and special responsibilities Kevin Gilmore B. Econ. MBA (Non-Executive Director) Michael Wendt (Non-Executive Chairman) Mr Wendt is the Chief Executive Officer of Wentronic Group, a market leading electronic accessory distributor that is headquartered in Braunschweig Germany. Wentronic employs over 200 people worldwide and has offices in Germany, Italy, and UK as well as in Hong Kong and China. Mr Wendt has over 26 years of experience in the international electronic accessory industry and has had roles in sales, marketing and human relations. Mr Wendt is currently a member of the Remuneration (Chairman), Audit and Strategy Committees. Alan Sparks GAICD, CTA, CA (SA) (Executive Director) Mr Sparks was appointed as the Chief Executive Officer of Cellnet on the 7th May 2014. Prior to his appointment Mr Sparks held senior executive roles with Philips Consumer Electronics, Carrier and Belkin. He has had over 40 years’ experience in distribution, retail, business to business, technology and manufacturing companies where he has gained extensive experience in restructuring, building businesses and managing mergers, acquisitions and divestments. Mr Sparks is a Chartered Accountant and is currently a member of the Risk (Chairman) and Strategy Committees. Brian Danos B. Bus (Management) (Non-Executive Director) Mr Danos is the General Manager for Wentronic Asia Pacific Limited. He has held this position since April 2015 and he leads the overall operations of the Asian region and directs Mr Gilmore is the Managing Director of Wentronic International Pte. Ltd. He has also held management positions with many multinational corporations such as General Electric, Shell Petroleum, Philips Electronics and Belkin where he has gained extensive experience in strategy, business development and marketing. Mr Gilmore is currently a member of the Strategy (Chairman), Audit and Remuneration Committees. Michael Reddie LLB, BCom (Hons), Monash University (Non-Executive Director) Mr Reddie is an Australian Legal Practitioner and is a Director of Reddie Lawyers Pty. Ltd. Mr Reddie was formerly a partner at a national law firm. Mr Reddie advises Australian and international clients in negotiated mergers and acquisitions, joint ventures, strategic alliances and corporate governance. Mr Reddie is currently a member of the Audit (Chairman) and Risk Committees. As at the date of this report, the interest of the directors (including their related parties) in the shares and options of Cellnet Group Limited were: Director M. Wendt A. Sparks B. Danos K. Gilmore M. Reddie Number of ordinary shares Number of options/ performance rights 33,691,380 1,300,000 - 400,000 - - - - - - Page 14 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Directors’ Report Company Secretary Chris Barnes B. Acc, CPA (Company Secretary and Chief Financial Officer) Mr Barnes has been with the Company since 2006. He holds a Bachelor of Accounting Degree and is CPA qualified. Dividends A final dividend of $0.0125 per share was declared 17 August 2018 with a payment date of 8 October 2018. Principal activities The principal activities of the consolidated entity are: • Sourcing products and the distribution of market leading brands of lifestyle technology products including mobile phone, tablet and notebook/hybrid accessories into retail and business channels in Australia and New Zealand; and • Fulfilment services to the mobile telecommunications and retail industries in Australia and New Zealand. As the partner to many of the world’s premier brands, Cellnet has continued to consolidate its position as the leading distributor for mobility accessories in the Australian and New Zealand marketplace with strong contractual relationships with leading Telcos, Consumer Electronic Retailers and specialty stores across the region. Our Category Management approach has differentiated Cellnet from its competitors and is assisting our customers improve their profitability and end user offering. We remain well poised to grow via acquisition and the board will continue to evaluate opportunities which align with the company’s strategy. A partially franked dividend of 1.25 cents per share was paid in September 2017 and the Board has declared an unfranked final dividend of 1.25 cents per share for the 2018 financial year. Significant changes in the state of affairs There have been no significant changes in the state of affairs of the company during the current year. Significant events after balance date There have been no matters or circumstances that have arisen since the end of the financial year which have significantly affected or may significantly affect the operations of Cellnet Group Limited, the results of those operations, or the state of affairs of Cellnet Group Limited in future years. Operating and financial review The Directors have pleasure in presenting the results of the company which consistently show improvement. Turnover increased by 5.8% and profit from operations increased by 55.6% year on year. Net profit from operations amounted to $3.1m or 5.6c per share (2017 - $2m or 3.9c per share). The company has recognised a deferred tax asset resulting from tax timing differences on the valuation of inventory for which a tax benefit of $2.8m has been taken to account. The resulting net profit attributable to shareholders amounted to $5.9m for the year. The company’s balance sheet has strengthened to show low net cash borrowings of $0.15m (2017: $4.8m) and a Net Tangible Asset Value of 32c per share (2017: 28.1c). Page 15 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Likely developments Share options In respect of future strategy and future performance, the consolidated entity is constantly reviewing the strategic value inherent in the business. In conjunction with this, the consolidated entity will continue to pursue its trading activities to further improve on operational aspects to produce the most beneficial long term results for the shareholders of the Company. At the date of this report there were a total of 2,212,500 share options over ordinary shares in the company on issue. No option holder has any rights under the terms of the instruments to participate in any other share issue of the company or any other entity. A total of 2,000,000 ordinary shares were issued on the exercise of share options during the year, and at total of 2,813,667 ordinary shares were issued on the exercise of performance rights. Details of these instruments are outlined as follows: Options Grant Date Vest Date Expiry Date Exercise Price ($) Opening Granted Lapsed Exercised Closing 24/10/2014 24/10/2014 31/10/2017 29/11/2017 30/08/2020 30/08/2022 17/04/2018 30/08/2020 30/08/2022 0.25 0.28 0.375 2,400,000 - (400,000) (2,000,000) - - - 1,900,000 312,500 - - - - 1,900,000 312,500 Performance rights Grant Date Vest Date Expiry Date* Exercise Price ($) Opening Issued Lapsed/ Forfeited Exercised Closing 3/2/2015 3/2/2015 3/2/2015 1/8/2016 1/8/2016 1/8/2016 1/8/2016 30/6/2016 30/9/2017 30/6/2017 30/9/2017 30/6/2017 30/9/2017 30/6/2019 30/9/2019 30/6/2017 30/9/2019 30/6/2018 30/9/2019 30/6/2019 30/9/2019 ^ Vested and exercisable. - - - - - - - 286,333 286,334 1,741,000 334,000 55,333 55,333 55,334 - - - - - - - - - - - - - - (286,333) (286,334) (1,741,000) (334,000) (55,333) (55,333) (55,334) Page 16 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Directors’ Report Indemnification and insurance of officers Committee membership Indemnification The Company has agreed to indemnify the current and former Directors and Company Secretaries of its controlled entities for all liabilities to another person, other than the Company or a related body corporate that may arise from their position, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Insurance premiums Insurance premiums have been paid in respect of Directors’ and Officers’ Liability Insurance. Insurance premiums paid for Directors insurance covers Directors whilst they are appointed as Directors of the Company and for a period of seven years after their resignation. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of Directors’ and Officers’ liability insurance as such disclosure is prohibited under the terms of the contract. Directors’ meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Company during the financial year are: Meetings of Committees Board Audit Risk Remuneration Strategy 12 12 12 12 12 11 2 2 - - 2 2 M. Wendt A. Sparks B. Danos K. Gilmore M. Reddie Number of meetings held: 1 Number of meetings attended: - 1 1 - 1 1 1 - 1 1 - 1 1 1 - 1 - As at the date of this report the Company had an Audit Committee, Risk Committee, Remuneration Committee and Strategy Committee. Members acting on the committees of the Board during the year were: Audit Remuneration Strategy Risk M. Reddie (Chairman) M. Wendt K. Gilmore M. Wendt (Chairman) B. Danos K. Gilmore K. Gilmore (Chairman) M. Wendt A. Sparks A. Sparks (Chairman) D. Danos M. Reddie Non-audit services The following non-audit services were provided by the entity’s current auditor, Pitcher Partners during the year. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Pitcher Partners received or are due to receive the following amounts for the provision of non-audit services: Consolidated 2018 $ 59,810 2017 $ 7,250 Taxation Services Rounding The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Report) Instrument 2016/191 dated 1 April 2016 and in accordance with that Instrument, amounts in the Financial Report and Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. Auditor’s independence declaration The Auditor’s Independence Declaration is set out on page 18 and forms part of the Directors’ report for the financial year ended 30 June 2018. Page 17 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Auditor’s independence declaration The Directors Cellnet Group Limited 59-61 Qantas Drive EAGLE FARM QLD 4009 Auditor’s Independence Declaration As lead auditor for the audit of Cellnet Group Limited for the year ended 30 June 2018, I declare that, to the best of my knowledge and belief, there have been: i. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and ii. no contraventions of APES 110 Code of Ethics for Professional Accountants in relation to the audit. This declaration is in respect of Cellnet Group Limited and the entities it controlled during the year. PITCHER PARTNERS JASON EVANS Partner Brisbane, Queensland 17th August 2018 Page 18 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Directors’ Report Remuneration Report (audited) This remuneration report for the year ended 30 June 2018 outlines the remuneration arrangements of the consolidated entity in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308 (3C) of the Act. The remuneration report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the consolidated entity, directly or indirectly, including any director (whether executive or otherwise) of the parent. 1. Individual key management personnel disclosures Key management personnel (i) Directors M. Wendt A. Sparks B. Danos K. Gilmore M. Reddie A. Beard Chairman (Non-Executive) – Appointed 16 January 2017 Director (Executive) – Appointed 16 January 2017 Director (Non-Executive) – Appointed 16 January 2017 Director (Non-Executive) – Appointed 16 January 2017 Director (Non-Executive) – Appointed 16 January 2017 Chairman (Non-Executive) – Retired 16 January 2017 M. Brookman Director (Non-Executive) – Retired 16 January 2017 E. Kaplan Director (Non-Executive) – Retired 16 January 2017 Remuneration report approval at FY17 AGM The FY17 remuneration report received positive shareholder support at the FY17 AGM with a vote of 99.0% in favour. (ii) Executives D. Clark C. Barnes General Manager - New Zealand Chief Financial Officer and Company Secretary For the purposes of this report, the term “executive” includes the executive directors, senior executives, general managers and secretaries of the consolidated entity and the term “director” refers to non-executive directors only. The remuneration report is presented under the following sections: 1. Individual key management personnel disclosures 2. Remuneration at a glance 3. Board oversight of remuneration 4. Non-executive director remuneration arrangements 5. Executive remuneration arrangements and the link to company performance 6. Executive contractual arrangements 7. Additional statutory disclosures 2. Remuneration at a glance Remuneration levels for key management personnel are competitively set to attract and retain appropriately qualified and experienced executives. The Board as necessary obtains independent advice on the appropriateness of remuneration packages of the consolidated entity given trends in comparative companies both locally and internationally and the objectives of the Company’s remuneration strategy. Non-Executive Directors receive a fixed fee for their services. The remuneration structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The remuneration structures take into account: • • the capability and experience of the key management personnel; the key management personnel’s ability to control performance; • the consolidated entity’s performance including: – – the consolidated entity’s earnings; and the growth in share price and delivering of constant returns on shareholder wealth; • the amount of incentives within each key management person’s remuneration. Page 19 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Remuneration Report (audited) continued Remuneration packages include a mix of fixed and variable remuneration including short and long-term performance-based incentives. 3. Board oversight of remuneration Remuneration committee The remuneration committee is responsible for making recommendations to the board on the remuneration arrangements of directors and executives. The remuneration committee assesses the appropriateness of the nature and amount of remuneration of non-executive directors and executives on a periodic basis by reference to the relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high performing director and executive team. Remuneration strategy Cellnet Group Limited’s remuneration strategy is designed to attract, motivate and retain employees and non-executive directors by identifying and rewarding high performers and recognising the contribution of each employee to the continued growth and success of the consolidated entity. $10,000 per annum. Non-Executive Directors do not receive performance related remuneration. Non-executives may, at the discretion of the Remuneration Committee and subject to shareholder approval, receive compensation in the form of share options. No options were issued to Non-Executive Directors during the current or previous financial years. 5. Executive remuneration arrangements and the link to company performance 5.1 Fixed remuneration Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any fringe benefits tax charges related to employee benefits including motor vehicles) as well as employer contributions to superannuation funds. Remuneration levels are reviewed annually by the Board. 5.2 Variable remuneration – short term incentive (STI) and long term incentive (LTI) Performance linked remuneration includes both STI and LTI and is designed to reward key management personnel for meeting or exceeding their financial and personal objectives. The STI is an ‘at risk’ bonus provided in the form of cash. To this end, key objectives of the Company’s reward framework are to ensure that remuneration practices: 5.3 STI bonus • are aligned to the consolidated entity’s business strategy; • offer competitive remuneration benchmarked against the external market; • provides strong linkage between the individual and the performance and rewards of the consolidated entity. Remuneration structure In accordance with best practice corporate governance, the structure of non-executive director and executive remuneration is separate and distinct. 4. Non-executive director remuneration arrangements Total remuneration for all Non-Executive Directors, last voted upon by shareholders at the 1999 AGM, is not to exceed $300,000 per annum. The Chairman’s base fee is $10,000 per annum and Non-Executive Directors’ base fees are presently The consolidated entity operates an annual STI program that applies to executives and awards a cash bonus subject to the attainment of clearly defined consolidated entity, business unit and individual measures. Actual STI payments awarded to each executive depends on the extent to which specific targets set at the beginning of each 12 months are met. The targets consist of a number of key performance indicators (KPI’s) covering financial and non-financial, corporate and individual measures of performance. A summary of these measures and weightings are set out below. Net Cash Position EBITDA Sales Revenue Chief Executive Officer General Manager New Zealand Chief Financial Officer 15% 15% 15% 70% 70% 70% 15% 15% 15% These performance indicators were chosen as they represent the key drivers for the short term success of Page 20 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Directors’ Report the business and provide a framework for delivering long-term value. to one ordinary share. The exercise price of the option is determined by the Board. At the end of the financial year the Board assesses the actual performance of the consolidated entity and the individual against their respective financial KPI’s set at the beginning of the financial year. A percentage of the pre-determined maximum amount is only awarded where results are achieved of between 100% and 200%. No bonus is awarded where performance falls below 100%. Performance of beyond 200% is not awarded as it is capped. The following table outlines the proportion of the maximum STI that was earned and forfeited in relation to the 2018 financial year. Proportion of maximum STI earned in FY18 Proportion of maximum STI forfeited in FY18 A. Sparks D. Clark C. Barnes 46% 46% 46% 54% 54% 54% No other members of the Company’s key management personnel were eligible to earn an STI in the 2018 financial year. STI awards for 2017 and 2018 financial years For the 2018 financial year, a total payment of $208,869 was made which represents 100% of the total STI cash bonus previously accrued in that period which has vested to executives. For the 2017 financial year, a total payment of $262,282 was made which represented 100% of the total STI cash bonus previously accrued in that period which had vested to executives. 5.4 LTIs Executive Share Option Plan The Board has established an Executive Share Option Plan which is designed to provide incentives to the Executives of the consolidated entity. The plan was approved by shareholders at the Annual General Meeting held on 18 December 2007. Under the plan the Board has the discretion to issue options to Executives as long as the issue does not result in the Executive owning or controlling the exercise of voting power attached to 5% or more of all shares then on issue. Each option is convertible The rules governing the operation of the plan may be amended, waived or modified, at any time by resolution of the Board provided there is no reduction of rights to Executives in the plan. If an amendment reduces the rights of Executives in the plan, it requires written consent of three-quarters of affected Executives. The plan may be terminated or suspended at any time by a resolution of the Board, provided the termination or suspension does not materially adversely affect the rights of persons holding shares issued under the plan at that time. The following table summarises the options issued to KMP in the 2018 financial year. There were no options issued to KMP under the plan in the 2017 financial year. KMP Grant Date No. Granted Exercise Price ($) Vesting Date No. Forfeited Closing Balance D. Clark 29/11/2017 124,000 $0.28 30/08/2020 D. Clark 29/11/2017 124,000 $0.28 30/08/2021 D. Clark 29/11/2017 177,000 $0.28 30/08/2022 C. Barnes 29/11/2017 124,000 $0.28 30/08/2020 C. Barnes 29/11/2017 124,000 $0.28 30/08/2021 C. Barnes 29/11/2017 177,000 $0.28 30/08/2022 - - - - - - 124,000 124,000 177,000 124,000 124,000 177,000 A further 500,000 options are proposed to be granted to the Chief Executive Officer on the same terms as those granted to executives above, pending approval at the company’s next annual general meeting. The grant date of these options, where approved, will be the date of the AGM. LTl Plan The Board has established a Long Term Incentive Plan which is designed to provide incentives to the Executives of the consolidated entity. The plan was approved by shareholders at the Annual General Meeting held on 18 December 2007. The purpose and rules of the plan are the same as the Executive Share Option Plan described above, except that there is no prohibition on issuing shares if it would result in an Executive owning (legally or beneficially) or controlling the exercise of voting power attached to 5% or more of all shares then on issue. No shares were issued under the LTI plan during the 2018 year (2017: Nil). Page 21 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Remuneration Report (audited) continued Performance Rights Plan On 24 October 2014 at the Company’s Annual General Meeting, shareholders approved a performance rights plan. Under this plan, performance rights are issued to key management personnel. The rights deliver ordinary shares to key management personnel (at no cost to the executive) where the performance hurdle in relation to those performance rights is met. Following the exercise of a Right, the Company must, within such time as the Board determines, issue or allocate to or acquire on market for the person exercising the Right, the number of shares in respect of which the Right has been exercised, credited as fully paid. No rights (2017: nil) were issued to KMP under this plan during the current year. The following table summarises the performance rights issued in the 2015 financial year held by at any time during the 2018 financial year: KMP Grant Date No. Granted Grant Date Fair Value ($) Incremental Fair Value# ($) Exercise Price ($) No. Forfeited No. Vested % Vested A. Sparks A. Sparks C. Barnes C. Barnes D. Clark D. Clark 3/2/2015 3/2/2015 3/2/2015 3/2/2015 3/2/2015 3/2/2015 871,000* 429,000^ 200,000* 100,000^ 335,000* 165,000^ 0.13 0.28 0.13 0.28 0.13 0.28 0.23 0.23 0.23 - - - - - - - - - - - - 871,000 429,000 200,000 100,000 335,000 165,000 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% All vested rights above were exercised during the current financial year. Original conditions attached to performance rights: * Rights vest subject to achievement of a total shareholder return (TSR) performance hurdle. Rights will vest if the TSR over the performance period, being 1 July 2014 to 30 June 2017, has increased by at least 20% per annum on a compounding basis. TSR will be calculated by the Board as the difference in share price from $0.25 per share over the performance period, plus the value of shares earned from notionally reinvesting dividends received over this period, expressed as a percentage of the share price of $0.25. The closing share price is calculated as the volume weighted average sale price of shares on the ASX for the 10 trading days up to and including the date that is 10 trading days following the date FY17 audited results are released to the market. Employees must remain in service with the company throughout the measurement period for the rights to vest. ^ Rights vest subject to achievement of profit before tax (PBT) performance hurdles in respect of each of the 2015, 2016 and 2017 financial years. Each annual PBT performance hurdle is achieved if actual PBT is equal to or greater than 120% of Budgeted PBT. Actual PBT means the profit before tax disclosed in the Company’s audited financial statements for the relevant performance period as adjusted in the Board’s discretion for one-off, abnormal and non-recurring items or such other matters that the Board considers fair and reasonable. Budgeted PBT means the profit before tax set out in any budget approved by the Board from time to time for the relevant performance period. The rights are subject to a cumulative vesting condition if a PBT hurdle in one or more periods is not achieved. The last date for measurement is the date which is 30 days subsequent to the release of 30 June 2017 audited results to the market. Employees must remain in service with the company throughout the measurement period for the rights to vest. Amendments to the terms of performance rights: # In connection with the proportional takeover offer announced by the Company on 11 November 2016, the Board of Directors resolved, as prescribed under the Company’s performance rights plan, to amend the terms of performance rights on issue. These amendments, which applied from the date the takeover offer was successfully completed (January 2017), removed performance vesting conditions on all performance rights on issue. Where modifications increase the fair value of the equity instruments granted measured immediately before and after the modification, the group is required to recognise the incremental fair value as part of the remuneration of employees. The incremental fair value granted is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification. The fair value of those performance rights with a market-based original vesting condition (TSR) at the date the condition was removed was equal to the share price of the company on that date, being $0.26. 5.5 STI structure The Board considers that the above performance-linked remuneration structure is appropriate at this time. It provides both short-term focus on operating performance and longer term focus on share price growth. Improving the performance of the operations was the main focus in setting the financial year 2018 short-term incentive. 5.6 Consequences of performance on shareholder wealth In considering the consolidated entity’s performance and benefits for shareholder wealth, the Board has regard to the following indices in respect of the current financial year and previous financial years. Net profit/(loss) attributable to equity holders of the Company $3,163,000 $2,035,000 $1,748,000 $1,649,000 ($3,887,000) 2018 2017 2016 2015 2014 Dividends paid Reduction of share capital Change in share price 5.7 Other benefits $688,946 $649,325 - $0.105 - $0.07 $557,071 $746,000 - - - - - $0.03 $0.01 During the current and prior year, there were no non-cash bonuses or benefits paid to key management personnel. Page 22 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Directors’ Report 6. Executive contractual arrangements It is the consolidated entity’s policy that service contracts for key management personnel are unlimited in term but capable of termination as per the relevant period of notice and that the consolidated entity retains the right to terminate the contract immediately, by making payment that is commensurate with pay in lieu of notice. The service contract outlines the components of remuneration paid to the key management person but does not prescribe how remuneration levels are modified year to year. Remuneration levels are reviewed each year to take into account cost-of-living changes, any change in the scope of the role performed by the senior executive and any changes required to meet the principles of the remuneration policy. Standard KMP termination payment provisions apply to all current members of the KMP, including the Chief Executive Officer. The standards KMP provisions are as follows: Notice period Payment in lieu of notice Treatment of STI on termination Treatment of LTI on termination Employer initiated termination Termination for serious misconduct Employee initiated termination 3 months None 3 months 3 months Pro-rated for time and performance Pro-rated for time and performance None Unvested awards forfeited Unvested awards forfeited 3 months Pro-rated for time and performance Pro-rated for time and performance 6.1 Directors’ and executive officers’ remuneration The remuneration report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the consolidated entity, directly or indirectly, including any director (whether executive or otherwise). Remuneration of Directors and KMP are as follows: Short Term $ Post Employment $ Long Term Benefits $ Year Salary & Fees STI Cash Bonus Motor Vehicle Allowances Non Monetary benefits Superannuation Benefits Cash Incentives Long Service Leave Share-based Payment Termination/ Retention Benefits Total % Performance Related % Options/Rights Non-executive directors M. Wendt B. Danos K. Gilmore M. Reddie A. Beard (i) M. Brookman E. Kaplan (ii) Total 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 10,000 5,000 10,000 5,000 10,000 5,000 10,000 5,000 - - - 29,167 - - 40,000 49,167 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 10,000 5,000 10,000 5,000 10,000 5,000 10,000 5,000 - - - 29,167 - - 40,000 49,167 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Page 23 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Remuneration Report (audited) continued 6.1 Directors’ and executive officers’ remuneration (continued) Short Term $ Post Employment $ Long Term Benefits $ Year Salary & Fees STI Cash Bonus Motor Vehicle Allowances Non Monetary benefits Superannuation Benefits Cash Incentives Long Service Leave Share-based Payment Termination/ Retention Benefits Total % Performance Related % Options/Rights Executive directors A. Sparks 2018 2017 264,211 60,904 265,274 67,671 Other key management personnel D. Clark C. Barnes Total 2018 2017 2018 2017 2018 2017 184,961 98,814 198,932 139,999 207,439 49,151 201,968 54,612 656,611 208,869 17,366 666,174 262,282 18,631 Totals (Directors & KMP) 2018 696,611 208,869 17,366 2017 715,341 262,282 18,631 - - 17,366 18,631 - - - - - - - - - - - - 26,478 23,178 9,916 10,779 25,166 24,713 61,560 58,670 61,560 58,670 - - - - - - - - - - - - 1,299 312,381 11,128 3,025 2,039 2,643 30,981 13,771 120,146 3,025 72,088 7,349 33,020 504,615 13,771 7,349 33,020 504,615 - - - - - - - - 352,892 668,504 325,210 490,526 287,424 384,361 965,526 1,543,392 1,005,526 1,592,559 17.6 56.9 31.3 53.0 18.2 33.0 22.4 49.7 21.5 48.2 0.4 46.7 0.9 24.5 1.1 18.8 0.8 32.7 0.7 31.7 (i) During the 2017 financial year the Company paid management fees to CVC Managers Pty Limited totalling $31,792 in relation to director’s services performed by Mr A Beard. (ii) During the 2017 financial year the Company paid management fees to CVC Managers Pty Limited totalling $29,167 in relation to director’s services performed by Mr E Kaplan. 7. Additional statutory disclosures This section sets out the additional disclosures required under the Corporations Act 2001. Transactions with related parties: During the 2018 financial year, Cellnet purchased inventory from Wentronic Asia Pacific, a fellow subsidiary of Wentronic Holding Gmbh, to the value of $11,452,000. Joint venture with entity with ultimate control over the group During the 2018 financial year, the Group and Wentronic Holding Gmbh established a joint venture entity, Wentronic International Pte Ltd, incorporated in Singapore. The Group holds a 49% interest in this entity and the investment is equity accounted for on the Group’s balance sheet. The initial contribution of both shareholders to the joint venture was USD 200,000. Cellnet Group Limited’s share of profit of the joint venture for the period from its incorporation to 30 June 2018 was $9,576. Option/right holdings This table below details the number of options or rights over ordinary shares in the company held by directors, KMP or their related parties: Director/KMP No. Held at 1/7/2017 No. Granted No. Lapsed No. Exercised No. Held at 30/6/2018 1,600,000 400,000 400,000 - 1,157,000 267,000 445,000 - - - - - 425,000 425,000 - (1,600,000) (400,000) - - - - - - (400,000) - (1,157,000) (267,000) (445,000) - - - - - 425,000 425,000 M. Wendt B. Danos K. Gilmore M. Reddie A. Sparks C. Barnes D. Clark Page 24 No. Vested & Exercisable - - - - - - - Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Directors’ Report Shareholdings: The table below details the number of ordinary shares in the company held by directors, KMP or their related parties. Unless otherwise stated, shares were acquired on-market. Director/KMP No. Held at 1/7/2017 No. Acquired - On Market No. Acquired – Exercise of Options No. Disposed No. Held at 30/6/2018 M. Wendt K. Gilmore A. Sparks C. Barnes D. Clark 34,991,380 - 143,000 55,708 55,000 - - - - - 1,600,000 400,000 1,157,000 267,000 445,000 (2,900,000) - - - - 33,691,380 400,000 1,300,000 322,708 500,000 End of Remuneration Report This report is made with a resolution of the Directors: Michael Wendt Chairman Signed at Brisbane on 17th August 2018 Page 25 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Page 26 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 FINANCIAL REPORT Page 27 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 FINANCIAL REPORT Statement of financial position As at 30 June 2018 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Total current assets Non-current assets Property, plant and equipment Deferred tax assets (net) Investment in associate Intangible assets Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Provisions Current tax liabilities Derivative financial instruments Interest-bearing loans and borrowings Total current liabilities Non-current liabilities Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY Note 10 11 12 18 13 8(c) 14 15 16 8(c) 18 17 16 19(a) 19(b) Consolidated 2018 $000 2,253 11,610 10,421 38 24,322 136 3,844 281 757 5,018 29,340 4,915 665 136 - 2,403 8,119 55 55 8,174 21,166 31,453 10,801 (21,088) 21,166 2017 $000 1,505 13,487 13,238 - 28,230 249 930 - 36 1,215 29,445 6,560 572 82 239 6,326 13,779 13 13 13,792 15,653 30,953 5,788 (21,088) 15,653 The above statement of financial position should be read in conjunction with the accompanying notes. Page 28 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Statement of comprehensive income For the year ended 30 June 2018 Note Continuing operations Sales of goods Rendering of services Revenue Other income Depreciation and amortisation expense Employee benefit expense Finance costs Freight expense Materials, packaging and consumables used Occupancy expense Warehousing expense Transaction advice Other expense Profit from continuing operations before income tax Income tax (expense) / benefit Net profit for the period Items that may be reclassified subsequently to profit or loss Foreign currency translation Total comprehensive income for the period 6 7 8(b) Consolidated 2018 $000 87,367 139 87,506 13 (177) (9,508) (612) (2,144) (66,035) (539) (2,782) - (2,555) 3,167 2,815 5,982 (362) 5,620 Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 9 9 Earnings per share for profit attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 9 9 10.7 10.7 10.7 10.7 The above statement of comprehensive income should be read in conjunction with the accompanying notes. 2017 $000 82,397 288 82,685 5 (164) (9,694) (524) (2,307) (62,821) (514) (2,017) (337) (2,277) 2,035 - 2,035 22 2,057 3.9 3.8 3.9 3.8 Financial Report Page 29 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Statement of changes in equity At 1 July 2017 Profit for the period Foreign currency translation Total comprehensive income for the period Share capital $000 30,953 - - Transactions with owners in their capacity as owners: Transfers to/from reserves Share based payments Exercise of options Dividends paid - - 500 - Balance as at 30 June 2018 31,453 At 1 July 2016 Profit for the period Foreign currency translation Total comprehensive income for the period 30,953 - - Transactions with owners in their capacity as owners: Transfers to/from reserves Share based payments Share buy back Dividends paid - - - (25) - - - - - - (25) (25) - - - - - Reserve for own shares $000 Foreign Currency translation reserve $000 Share based payment reserve $000 Reserve for Profits $000 Accumulated losses $000 Total equity $000 1,631 4,226 (406) 1,713 942 2,840 (44) (362) (362) - - - - (66) 22 22 - - - (44) 5,982 (5,982) (21,088) 5,982 - 15,653 5,982 (362) 5,982 5,620 - 82 500 (689) - - - (21,088) 21,166 (21,088) 2,035 13,556 2,035 22 2,035 2,057 - - (689) 9,519 - - - - 2,035 (2,035) - - (649) 4,226 - - - (21,088) - 689 - (649) 15,653 - - - 82 - - - - 689 - - 1,631 Balance as at 30 June 2017 30,953 (25) The above statement of changes in equity should be read in conjunction with the accompanying notes. Page 30 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Statement of cash flows For the year ended 30 June 2018 Note 29 6 13 14 Cash flows from / (used in) operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Income tax paid Interest paid Net cash flows from / (used in) operating activities Cash flows used in investing activities Interest received Payments for investments in associates Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Payments for purchase of intangibles Net cash flows used in investing activities Cash flows from / (used in) financing activities Exercise of options Proceeds from borrowings Repayment of borrowings Dividends Net cash flows from / (used in) financing activities Net decrease in cash and cash equivalents Net foreign exchange differences Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 10 The above statement of cash flows should be read in conjunction with the accompanying notes. Consolidated 2018 $000 98,899 (92,332) (46) (473) 6,048 3 (259) - (37) (748) (1,041) 500 31,889 (35,812) (689) (4,112) 895 (147) 1,505 2,253 2017 $000 88,446 (92,827) - (387) (4,768) 1 - 4 (83) (10) (88) - 28,686 (23,123) (649) 4,914 58 36 1,411 1,505 Financial Report Page 31 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 1. Corporate Information Compliance with IFRS Cellnet Group Limited (the ‘Company’) is a company limited by shares and incorporated in Australia. The consolidated financial report of the Company for the financial year ended 30 June 2018 comprises the Company and its subsidiaries (together referred to as the ‘consolidated entity’). The company is a for-profit entity for the purpose or preparing these financial statements. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company. The financial report was authorised for issue by the Directors on 17th August 2018. The nature of the operations and principal activities of the consolidated entity are described in the directors’ report. 2. Significant accounting policies (a) Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report is presented in Australian dollars and has been prepared on the historical cost basis, except for derivative financial instruments which are measured at fair value. The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Report) Instrument 2016/191 dated 1 April 2016 and in accordance with that Instrument, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The Financial Report complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. (b) New accounting standards and interpretations Relevant accounting standards and interpretations that have recently been issued or amended but are not yet effective and have not been adopted for the year are as follows: (i) Application of new accounting standards No new or revised standards considered as having a material effect on the consolidated entity have become effective for the first time in preparing this Financial Report. (ii) Accounting standards and interpretations issued but not yet effective Relevant accounting standards and interpretations that have recently been issued or amended but are not yet effective and have not been adopted for the year are as follows: Standard/ Interpretation Application date of standard Application date for the group AASB 9 Financial Instruments– revised and consequential amendments to other accounting standards resulting from its issue AASB 15 Revenue from Contracts with Customers and consequential amendments to other accounting standards resulting from its issue 1 Jan 2018 1 Jul 2018 1 Jan 2018 1 Jul 2018 AASB 16 Leases 1 Jan 2019 1 Jul 2019 The Directors anticipate that the adoption of these Standards and Interpretations in future years may have the following impacts: Page 32 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 AASB 9 – This revised standard provides guidance on the classification and measurement of financial assets, amendments to the requirements for classification and measurement of financial liabilities, and a new hedge accounting model to simplify hedge accounting requirements and more closely align hedge accounting with risk management activities. The standard replaces AASB 139 Financial Instruments: Recognition and Measurement. Under the new standard, a financial asset is to be measured at amortised cost only if it is held within a business model whose objective is to collect contractual cash flows and the contractual terms of the asset give rise on specified dates to cash flows that are payments solely of principal and interest (on the principal amount outstanding). All other financial assets are to be measured at fair value. Changes in the fair value of investments in equity securities that are not part of a trading activity may be reported directly in equity, but upon realisation those accumulated changes in value are not recycled to the profit or loss. Changes in the fair value of all other financial assets carried at fair value are reported in the profit or loss. The group has assessed that the changes to asset classification and measurement will not have a material impact on the group’s financial statements, based on the current types of financial assets held by the group. The new requirements for liabilities pertain to liabilities at fair value through profit or loss, whereby the portion of the change in fair value related to changes in the entity’s own credit risk is presented in other comprehensive income rather than profit or loss. There will be no significant impact on the Group’s accounting for financial liabilities, as the Group’s financial liabilities at fair value through profit or loss are not exposed to material risk of change in the group’s own credit risk. There will be no impact on the Group’s accounting as a result of the changes to hedge accounting requirements, as the Group does not presently utilise hedge accounting. Financial Report AASB 15 – This new standard replaces AASB 118 and AASB 111. It contains a single model that applies to contracts with customers and two approaches to recognising revenue. The model features a contract-based five step analysis of transactions to determine whether, how much and when revenue is recognised. The Group has assessed that the new standard will not have any material impact on the timing of recognition of its revenues in the initial period of application. AASB 16 – The new standard will replace AASB 117: Leases and introduces a single lessee accounting model that will require a lessee to recognise right-of-use assets and lease liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Right-of-use assets are initially measured at their cost and lease liabilities are initially measured on a present value basis. Subsequent to initial recognition: • Right-of-use assets are accounted for on a similar basis to non-financial assets, whereby the right-of-use asset is accounted for in accordance with a cost model unless the underlying asset is accounted for on a revaluation basis; and • Lease liabilities are accounted for on a similar basis as other financial liabilities, whereby interest expense is recognised in respect of the liability and the carrying amount of the liability is reduced to reflect lease payments made. Based on the Group’s current leasing arrangements the new standard will note have a material impact on the group’s financial statements, as the group has no current leases with an expiry date beyond 12 months of the initial application of the standard. This will be re-assessed in future periods based on changes to the Group’s leases. Page 33 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 2. Significant accounting policies continued (c) Basis of Consolidation (ii) Transactions and balances The consolidated financial statements comprise the financial statements of Cellnet Group Ltd and its subsidiaries (as outlined in note 23) as at and for the year ended 30 June each year (the consolidated entity). Interests in associates are equity accounted and are not part of the consolidated entity. Subsidiaries are all those entities over which the consolidated entity has control. The Group controls an entity where it has power over the entity, exposure or rights to variable returns from its involvement with the entity, and for which it has the ability to use its power over the entity to affect the amount of its returns. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profit and losses resulting from intra-group transactions have been eliminated in full. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (d) Foreign currency (i) Functional and presentation currency Both the functional and presentation currency of Cellnet Group Limited and its Australian subsidiaries are Australian dollars ($). The functional currencies of the New Zealand and Hong Kong subsidiaries are New Zealand dollars and United States dollars respectively, which are translated to the presentation currency as described in (iii) below. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance date are translated to Australian dollars at the foreign exchange rate ruling at reporting date. Foreign exchange differences arising on translation are recognised in net income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. (iii) Financial statements of foreign operations The assets and liabilities of foreign operations are translated to Australian dollars at foreign exchange rates ruling at the balance date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on translation are recognised directly in a separate component of equity. (e) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy (j)). Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. (ii) Leased assets Leases in terms of which the consolidated entity assumes substantially all the risks and rewards of ownership are classified as finance leases Page 34 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report (iii) Depreciation Depreciation is charged to net income on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives in the current and comparative periods are as follows: Leasehold improvements Plant and equipment Leased plant and equipment 3–5 years 2–3 years 3–5 years The residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually. embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (iv) Amortisation Amortisation is charged to net income on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment at each balance date. Other intangible assets are amortised from the date they are available for use over their estimated useful lives. (iv) Derecognition (g) Trade and other receivables An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. (f) Intangible assets (i) Goodwill - Business combinations Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. (ii) Other intangible assets Other intangible assets that are acquired by the consolidated entity are stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (j)). The Group’s other intangible assets represent software assets purchased by the entity or developed by a third party. (iii) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits Trade, loans and other receivables are stated at their amortised cost less impairment losses. Collectability of trade receivables is reviewed on an ongoing basis at a customer level. Individual debts that are known to be uncollectable are written off when identified. An impairment provision is recognised when there is objective evidence that the consolidated entity will not be able to collect the receivable. Debts which are aged greater than 120 days or more are considered as objective evidence of impairment and a provision of 80% is recognised. For any debts that are passed onto the consolidated entity’s solicitors for collection a provision of 100% is recognised. (h) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost is calculated using the average cost method and includes direct and allocated costs incurred in acquiring the inventories and bringing them to their present location and condition. A provision is recognised when there is objective evidence that the consolidated entity will not be able to sell the inventory at normal reseller pricing. Page 35 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 2. Significant accounting policies continued (i) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise of cash at bank and in hand and short term deposits with a maturity of 60 days or less that are readily convertible to known amounts of cash and which are subject to insignificant risks of change in values. (j) Impairment The carrying amounts of the consolidated entity’s assets, other than inventories (see accounting policy (h)), trade and other receivables (see accounting policy (g)) and deferred tax assets (see accounting policy (r)), are reviewed at each balance date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated (see accounting policy (j) (i)). For goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in net income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro-rata basis. (i) Calculation of recoverable amount The recoverable amount of assets (apart from receivables, inventory, and deferred tax) is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset relates. Impairment losses, other than in respect of goodwill, are reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimate used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (k) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (l) Interest-bearing loans and borrowings Interest-bearing borrowings are recognised initially at fair value of the consideration received less related transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in net income over the period of the borrowings on an effective interest basis. (m) Provisions and employee leave benefits (i) Provisions Provisions are recognised when the consolidated entity has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the consolidated entity expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when Page 36 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report service leave benefits described in note 2(m)(ii). Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. (n) Share based payment transactions The consolidated entity provides incentives to KMP in the form of share based payments. There are currently share based payment plans in place for the KMP. The cost of share based payments with KMP is measured by reference to the fair value of the equity instrument at the date at which they are granted (refer note 20 for further details). (o) Trade and other payables Trade and other payables are stated at their amortised cost. Trade payables are non-interest bearing and are normally settled on average between 30 day and 45 day terms. They represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year that are unpaid and arise when the consolidated entity becomes obliged to make future payments in respect of the purchase of these goods and services. (p) Revenue Goods sold and services rendered Revenue from the sale of goods is recognised in net income when the significant risks and rewards of ownership have been transferred to the customer. This transfer generally occurs when the goods are delivered to the customer. Revenue from the provision of warehousing services to external parties is recognised as the service is provided. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the costs incurred or to be incurred cannot be measured reliably, there is a risk of return of goods or there is continuing managerial involvement with the goods. Interest income is recognised in net income as it accrues, using the effective interest method. Dividend income is recognised in net income on the date the entity’s right to receive payments is established. Page 37 the reimbursement is virtually certain. The expense relating to any provision is presented in net income net of any reimbursement. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance date using a discounted cash flow methodology. The risks specific to the provision are factored into the cash flows and as such a risk-free government bond rate relative to the expected life of the provision is used as a discount rate. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. (ii) Long-term service benefits The consolidated entity’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to high quality corporate bonds at the balance date which have maturity dates approximating the terms of the consolidated entity’s obligations. (iii) Wages, salaries, annual leave and sick leave Liabilities for employee benefits for wages, salaries and annual leave that are expected to be wholly settled within 12 months of the reporting date represent present obligations resulting from employees’ services provided to reporting date, and are calculated using undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at reporting date including related on-costs, such as worker’s remuneration insurance and payroll tax. Amounts not expected to be wholly settled within 12 months are carried at a net present value determined in the same manner as long Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 2. Significant accounting policies continued (q) Leases (i) Operating lease payments Payments made under operating leases are recognised in profit or loss on a straight- line basis over the term of the lease. Lease incentives received are recognised in net income as an integral part of the total lease expense and spread over the lease term. (ii) Finance leases Finance leases, which transfer to the consolidated entity substantially all the risks and benefits incidental to ownership of the leased item are capitalised at the inception of the lease at fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in net income. (r) Income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred tax is provided using the statement of financial position method, providing for temporary differences between the carrying amounts of assets and liabilities for Financial Reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for - initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected Page 38 manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Tax consolidation The Company and its wholly-owned Australian resident subsidiaries have formed a tax-consolidated entity with effect from 1 July 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated entity is Cellnet Group Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax- consolidated entity are recognised in the separate financial statements of the members of the tax- consolidated entity using the ‘separate taxpayer’ within the consolidated entity approach. Deferred tax assets and deferred tax liabilities are measured by reference to the carrying amounts in the separate financial statements of each entity and the tax values applied under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses or unused tax credits of the subsidiaries are assumed by the head entity in the tax consolidated entity and are recognised as amounts payable / (receivable) to / (from) other entities in the tax-consolidated entity in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report The Company recognises deferred tax assets arising from unused tax losses and unused tax credits of the tax-consolidated entity to the extent that it is probable that future taxable profits of the tax-consolidated entity will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses and unused tax credits as a result of revised assessments of the probability of recoverability are recognised by the head entity only. Nature of tax funding arrangements The head entity, in conjunction with other members of the tax-consolidated entity, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated entity in respect of tax amounts. The tax funding arrangements require payments to / (from) the head entity equal to the current tax liability / (asset) assumed by the head entity and any tax-loss or tax credit related deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity payable / (receivable) equal in amount to the tax liability / (asset) assumed. The inter-entity payable / (receivable) is at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. (s) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the relevant taxation authority is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating cash flows. (t) Accounting estimates and judgements Management discussed with the Audit Committee the development, selection and disclosure of the consolidated entity’s critical accounting judgements and estimates and the application of these policies and estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Revenue recognition Revenue is recognised net of incentives and rebates offered to customers. Management makes estimates of the amount of incentives and rebates outstanding as at period end based on customer trading and claim history and the terms of underlying contractual arrangements. Such estimates involve the use of managerial judgement and the actual amount of incentives and rebates settled may vary from the amounts accrued at balance date. Impairment losses for trade receivables and stock on hand Note 11 contains information about the assumptions and their risk factors relating to trade receivable impairment losses and note 7 discloses the amount of stock that has been scrapped throughout the course of the year, or has been written down to net realisable value in accordance with the policy outlined in note 2 (h). Share based payments The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by management using either a binomial model or, where applicable, a Monte Carlo simulation Page 39 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 2. Significant accounting policies continued model. The related assumptions are detailed in note 20. The accounting estimates and assumptions relating to equity-settled share- based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise temporary differences and recognised tax losses. Significant judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits over the next three years together with future tax planning strategies. Where the consolidated entity has made a taxable loss in the current or preceding year, a tax asset is only recognised to the extent that there is convincing other evidence that sufficient taxable profit will be available against which the recognised unused tax losses can be utilised. (u) Non-current assets held for sale and discontinuing operations Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. In the statement of comprehensive income, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes. Page 40 (v) Earnings per share The consolidated entity presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. Potential ordinary shares shall be treated as dilutive when their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations. (w) Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Operating segments have been identified based on the information provided to the chief operating decision maker – being the Chief Executive Officer. Note 5 contains information on reportable segments. (x) Business combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination the consolidated entity elects whether it measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report expensed and included in administrative expenses. When the consolidated entity acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. (y) Financial instruments (i) Financial assets Initial recognition and measurement Financial assets within the scope of AASB139 are classified as financial assets at fair value through the profit or loss, loans and receivables, held to maturity investments, available for sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The consolidated entity determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through the profit or loss. The consolidated entity’s financial assets include cash and short term deposits, trade and other receivables, and derivative financial instruments. ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and when observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. (iii) Financial liabilities Initial recognition and measurement Financial liabilities within the scope of AASB 139 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge as appropriate. The consolidated entity determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair values plus, in the case of loans and borrowings, directly attributable transaction costs. The consolidated entity’s financial liabilities include trade and other payables. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. (ii) Impairment of financial assets (iv) Fair value of financial instruments The consolidated entity assesses, at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations, without any deductions for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Page 41 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 2. Significant accounting policies continued Such techniques may include: • Using recent arm’s length market transactions; • Using reference to current fair value of another instrument that is substantially the same; and • Applying a discount cash flow analysis or other valuation models. The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date. Primary responsibility for identification and control of financial risks rests with the Audit & Risk Committees under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including the setting of limits for forward currency contracts, credit allowances and future cash flow forecast projections. Interest rate risk The consolidated entity’s exposure to market interest rates relates solely to the consolidated entity’s short-term cash deposits and interest bearing loans and borrowings as disclosed in note 10 and 17. 3. Financial risk management objectives and policies The consolidated entity’s principal financial instruments comprise of receivables, payables, cash and short-term deposits, interest bearing loans and forward foreign currency contracts. Cash and cash equivalents Interest bearing loans and borrowings Note 10 17 2018 $000 2,253 2017 $000 1,505 (2,403) (6,326) (150) (4,821) Risk exposures and responses The consolidated entity manages its exposure to key financial risks, including interest and currency risk in accordance with the consolidated entity’s financial risk management policy. The objective of this policy is to support the delivery of the consolidated entity’s financial targets whilst protecting future financial security. The consolidated entity enters into derivative transactions, principally forward currency contracts. The purpose is to manage the currency risks arising from the consolidated entity’s operations. The main risks arising from the consolidated entity’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The consolidated entity uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and foreign exchange risk and assessment of market forecasts for interest rate and foreign exchange prices. Ageing analysis and monitoring of specific credit allowances are undertaken to manage credit risk. Liquidity risk is monitored through using future rolling cash flow forecasts. The consolidated entity frequently analyses its interest rate exposure. Within this analysis consideration is given to potential renewals of existing positions, alternative hedging positions and the mix of fixed and variable interest rates. The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date. At 30 June 2018, if interest rates had moved as illustrated in the table below, with all other variables held constant, post-tax profit and net assets would have been affected as follows: Post tax profit higher/(lower) Net assets higher/(lower) 2018 $000 (1) 1 2017 $000 (34) 17 2018 $000 (1) 1 2017 $000 (34) 17 Consolidated +1% (100 basis points) (2017: 1%) -0.5% (50 basis points) (2017: 0.5%) The movements in profit are due to higher / lower cash receipts / payments from variable rate net interest bearing balances. Page 42 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Foreign currency risk The consolidated entity is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than Australian dollars. The currencies giving rise to risk are primarily U.S. dollars and New Zealand dollars. The consolidated entity enters into forward foreign exchange contracts to hedge certain anticipated purchase commitments denominated in foreign currencies (principally U.S. dollars). The terms of these commitments are no more than 45 days. It is the consolidated entity’s policy not to enter into forward contracts until a firm commitment is in place. The consolidated entity has subsidiaries with function currencies of New Zealand and United States dollars. There are currently no hedges in place to mitigate the foreign currency risk for these subsidiaries. Entering into forward foreign currency exchange contracts minimises the risk of sharp fluctuations in foreign exchange rates and allows for better cash flow management in relation to paying international suppliers. At balance date, the consolidated entity had the following exposure to US$ foreign currency that is not designated as cash flow hedges: Financial assets Trade and other receivables Financial liabilities Trade and other payables Forward foreign currency contracts* Net exposure 2018 2017 USD $000 USD $000 96 96 (1,313) (740) (2,053) (1,957) 281 281 (3,310) (8,597) (11,907) (11,626) *Denotes the amount of USD to be exchanged at the forward exchange rate. At 30 June 2018, had the Australian dollar moved, as illustrated in the table below, with all other variables held constant, post-tax profit and other comprehensive income would have been affected as follows: Financial Report Post tax profit higher/(lower) Net assets higher/(lower) 2018 $000 2017 $000 2018 $000 2017 $000 170 (711) 170 (711) (207) 869 (207) 869 Consolidated AUD / USD +10% (2017: +10%) AUD / USD -10% (2017: -10%) Significant assumptions: - The reasonably possible movement was calculated by taking the USD spot rate as at balance date, moving the spot rate by the reasonably possible movements and then re-converting the USD into AUD with the ‘new spot rate’. This amount was then tax effected. This methodology reflects the translation methodology undertaken by the consolidated entity. Credit Risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The maximum exposure to credit risk on financial assets of the consolidated entity is the carrying amount, net of any impairment losses, as disclosed in the maturity analysis table below. The consolidated entity mitigates this risk by adopting procedures whereby it only deals with creditworthy customers. Where there is evidence of credit risk, an impairment loss is recognised. The consolidated entity also insures debtors that have an approved credit limit of greater than $5,000 through trade credit insurance. Trade receivables that are greater than $5,000 are insured up to 90% of the approved credit limit, with a $5,000 excess payable per claim. Liquidity risk Liquidity risk arises from the financial liabilities of the consolidated entity and the consolidated entity’s subsequent ability to meet its obligations to repay its financial liabilities as and when they fall due. The consolidated entity’s objective is to maintain a balance between continuity of at cash funding and short-term fixed cash deposits. The consolidated entity manages its liquidity risk by monitoring the total cash inflows and outflows expected on a daily basis. Page 43 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 3. Financial risk management objectives and policies continued Maturity analysis of financial assets and financial liabilities based on management’s expectation. Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Financial liabilities Trade and other payables Interest bearing loans and borrowings Net inflow Liquid financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Trade and other payables Interest bearing loans and borrowings Derivative financial instruments Net inflow Note Total $000 6 months or less 6–12 months 1–5 years More than 5 years 2018 10 11 18 15 17 10 11 15 17 18 2,253 11,610 38 13,901 (4,915) (2,403) (7,318) 6,583 2,253 11,610 38 13,901 (4,915) (2,403) (7,318) 6,583 - - - - - - - - - - - - - - - - - - - - - - - - 2017 Total 6 months or less 6–12 months 1–5 years More than 5 years 1,505 13,487 14,992 (6,560) (6,326) (239) 1,505 13,487 14,992 (6,560) (6,326) (239) (13,125) (13,125) 1,867 1,867 - - - - - - - - - - - - - - - - - - - - - - - - Page 44 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report 4. Fair Value Measurement The fair values together with the carrying amounts of financial assets and financial liabilities shown in the statement of financial position are outlined in the table below. For short term trade receivables and payables with a maturity date of less than one year, the carrying amount, as adjusted for any allowances for impairment, is deemed to reflect the fair value. 2018 2017 Note Carrying amount $000 Fair value $000 Carrying amount $000 Fair value $000 Amortised cost Cash and cash equivalents Trade and other receivables Trade and other payables Borrowings Fair value through profit or loss Derivative financial instruments 10 11 15 17 18 Fair value hierarchy 2,253 11,610 (4,915) (2,403) 38 6,583 2,253 11,610 (4,915) (2,403) 38 6,583 1,505 13,487 (6,560) (6,326) (239) 1,867 1,505 13,487 (6,560) (6,326) (239) 1,867 Outlined below are the judgements and estimates made in determining the fair value of assets and liabilities that are recognised and measured at fair value. To provide an indication about the reliability of the inputs used in determining fair value, the consolidated entity has classified its assets and liabilities into the three levels prescribed under the accounting standards, as follows: Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. Level 2: The fair value of financial instruments that are not traded in an active market is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. That is, all valuation inputs are observable. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. The only balance on the consolidated entity’s balance sheet which is measured at fair value are forward foreign exchange contracts (refer note 18). The fair value of these financial instruments is determined using forward exchange rates at the balance sheet date. Such fair value measurement is included in level 2, as it is based on an observable input. Page 45 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 5. Operating segments 6. Other revenue Interest Share of profits of associates Net gain on disposal of property, plant and equipment Total other revenue 2018 $000 3 10 - 13 7. Items included in profit/(loss) Doubtful debts expense Loss on scrapping of / provisioning for obsolete inventory Minimum lease payments – operating leases Share-based payments expense/ (income) Fair value (gains) / losses on FX derivatives Net foreign exchange losses / (gains) 2018 $000 51 659 433 82 (38) 372 2017 $000 1 - 4 5 2017 $000 54 588 397 689 239 (15) Identification of reportable segments The consolidated entity has identified its operating segment based on the internal reports that are reviewed and used by the Chief Executive Officer (the chief operating decision maker) in assessing performance and in determining the allocation of resources. The operating segment is identified by management based on the manner in which products are sold. For the 2017 and 2018 financial years the consolidated entity’s activities related solely to retail sales. As there is only one segment, segment revenues, profit/(loss), assets, and liabilities are consistent with those reported in the statement of comprehensive income and statement of financial position. Revenue from external customers by geographical location is detailed below. Revenue is attributable to geographic location based on the location of the customers. The company does not have external revenues from external customers that are attributable to any foreign country or region other than as shown. Australia New Zealand Asia Total revenue 2018 $000 70,153 17,353 - 87,506 2017 $000 64,241 17,890 554 82,685 Page 46 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report 8. Income Tax (a) Income tax (expense)/benefit The major components to income tax are: Current income tax charge Prior year under/over provision – current tax Deferred income tax charge Total income tax (expense)/benefit reported in net income 2018 $000 137 (37) (2,915) (2,815) (b) Numerical reconciliation between aggregate tax expense / (benefit) recognised in net income and tax expense calculated per the statutory income tax rate. A reconciliation between tax expense / (benefit) and the product of accounting profit before income tax multiplied by the consolidated entity’s applicable income tax rate is as follows: Accounting profit / (loss) before tax from continuing operations Total accounting profit before income tax At the parent entity’s statutory income tax rate 30% (2017: 30%) Adjustments in respect of income tax of previous years Entertainment Share-based payments Effect of lower tax rate in New Zealand (28%) Other Recognition of previously unrecognised deferred tax assets Current year losses not recognised Aggregate income tax expense / (benefit) 3,167 3,167 950 (1) 29 25 (9) (3) (3,803) (3) (2,815) 2017 $000 2018 $000 Consolidated 2018 $000 2017 $000 82 - (82) - 2,035 2,035 611 7 24 207 (5) (2) (861) 19 - 2017 $000 (c) Recognised deferred tax assets and liabilities Current income tax Deferred income tax Current income tax Deferred income tax Opening balance Tax paid Charged to income / (expense) FX translation Closing balance Amounts recognised in the statement of financial position: Current tax liability Deferred tax asset Deferred tax liability (82) 46 (100) - (136) (136) - - (136) 930 - 2,915 (1) 3,844 - 3,844 - 3,844 - - (82) - (82) (82) - - (82) 848 - 82 - 930 - 930 - 930 Page 47 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 8. Income Tax continued Deferred income tax at 30 June relates to the following: 9. Earnings per share Net deferred tax assets Doubtful debts Employee provisions Foreign exchange differences Sundry accruals Other Property, plant and equipment Inventory Tax losses carried forward Net deferred tax asset 2018 $000 53 213 (11) 238 87 - 3,264 - 3,844 2017 $000 35 174 49 175 31 134 - 332 930 As at 30 June 2018, the Company has a deferred tax asset relating to timing differences and tax losses arising from prior years totalling $3,844,000 (2017: $930,000). Management has recognised deferred tax assets on the basis that achievement of profit before tax within the period that deferred tax assets are expected to reverse (which for inventory is typically the next twelve months) is probable. (d) Tax losses The consolidated entity has gross tax losses, stated in the reporting currency of Australian dollars, for which no deferred tax asset is recognised on the statement of financial position of $7,408,237 (2017: $19,632,980) which are available indefinitely for offset against future gains subject to meeting the relevant statutory tests. The following reflects the income used in the basic and diluted earnings per share computations: 2018 $000 (a) Earnings used in calculating earnings per share For basic earnings per share Profit / (Loss) from continuing operations Net profit/(loss) attributable to ordinary equity holders For diluted earnings per share Profit / (loss) from continuing operations Net profit/(loss) attributable to ordinary equity holders 5,982 5,982 5,982 5,982 2017 $000 2,035 2,035 2,035 2,035 (b) Weighted number of shares Weighted average number of shares (basic) at 30 June Weighted average number of shares adjusted for effect of dilution 56,077 52,147 56,077 53,835 Potential ordinary shares under option and restricted shares are considered non-dilutive where the current share price is lower than the exercise price. (c) Earnings per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 2018 $000 10.7 10.7 2017 $000 3.9 3.8 Page 48 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report 10. Current assets – cash and cash equivalents Movements in the provision for impairment loss were as follows: Cash at bank and in hand Funds held by bank (note 22) 2018 $000 1,903 350 2,253 2017 $000 1,155 350 1,505 At 1 July Charge for the year Amounts written off As at 30 June 2018 $000 118 51 (38) 131 2017 $000 66 54 (2) 118 Cash and funds held at bank earns interest at floating rates based on daily bank deposit rates. Funds held by banks represent monies pledged to fulfil financial guarantee collateral requirements. At 30 June, the ageing analysis of trade receivables is as follows: 11. Current assets – trade and other receivables Trade receivables Allowances for impairment loss (a) Provision for credit notes 2018 $000 11,274 (78) (100) 11,096 2017 $000 12,684 (118) - 12,566 Other receivables and prepayments 514 921 Carrying amount of trade and other receivables 11,610 13,487 (a) Allowance for impairment loss Trade receivables are non-interest bearing and are generally on 30 day terms. Trade receivables are insured through a debtors’ insurance policy, as described in note 3. A provision for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired and not recoverable within the terms of the insurance policy. Consolidated 2018 $000 8,099 1,683 818 543 131 2017 $000 9,049 2,827 474 216 118 11,274 12,684 Not past due 0-30 days PDNI* 31-60 days PDNI* + 60 days PDNI* + 60 days CI* Total *Past due not impaired (PDNI) *Considered impaired (CI) Receivables past due but not considered impaired are $3,044,000 (2017: $3,517,000). Payment terms on these amounts have not been re-negotiated however credit has been stopped until full payment is made. Each debtor has been directly contacted by debt recovery agents and the consolidated entity is satisfied that payment will be received in full. Note 2(g) details how the Company manages and measures credit quality of trade receivables that are neither past due nor impaired. Page 49 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 12. Current assets – inventories Stock on hand Less: provision for obsolescence Total inventories at the lower of cost and net realisable value 2018 $000 11,674 (1,253) 10,421 2017 $000 14,103 (865) 13,238 13. Non-current assets – property, plant and equipment Reconciliation of the carrying amounts at the beginning and end of the period. Leasehold improvements Plant & Equipment For the year ended 30 June 2018 At 1 July 2017 net of accumulated depreciation and impairment Additions Write-offs Depreciation charge for the year At 30 June 2018 net of accumulated depreciation and impairment At 30 June 2018 Cost Accumulated depreciation and impairment Net carrying amount For the year ended 30 June 2017 At 1 July 2016 net of accumulated depreciation and impairment Additions Disposals Depreciation charge for the year At 30 June 2016 net of accumulated depreciation and impairment At 30 June 2017 Cost Accumulated depreciation and impairment Net carrying amount $000 32 1 - (30) 3 410 (407) 3 64 - - (32) 32 409 (377) 32 $000 217 36 - (120) 133 6,898 (6,765) 133 240 83 - (106) 217 6,862 (6,645) 217 Page 50 Total $000 249 37 - (150) 136 7,308 (7,172) 136 304 83 - (138) 249 7,271 (7,022) 249 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report 14. Non-current assets - intangible assets 17. Current liabilities - interest bearing loans and borrowings Opening balance Acquisitions Amortisation Closing balance 15. Current liabilities – trade and other payables Trade payables Other payables & accrued expenses 2018 $000 36 748 (27) 757 2018 $000 3,443 1,472 4,915 For terms and conditions relating to trade payables refer to Note 2(o). 16. Provisions Current Provision for long-service leave Liability for annual leave and employee provisions Non-Current Liability for long-service leave 2018 $000 140 525 665 55 55 2017 $000 52 10 (26) 36 2017 $000 5,228 1,332 6,560 2017 $000 132 440 572 13 13 Interest Rate Maturity 2018 $000 2017 $000 % 5.11 5.11 5.11 5.11 5.11 5.09 5.09 5.20 5.20 5.12 5.12 4.83 4.90 4.83 4.83 4.90 4.90 5.18 Business Finance 2 July 2018 2 July 2018 2 July 2018 2 July 2018 2 July 2018 12 July 2018 13 July 2018 16 July 2018 23 July 2018 25 July 2018 27 July 2018 10 July 2017 24 July 2017 28 July 2017 28 July 2017 31 July 2017 31 July 2017 Invoice Finance Various 376 24 387 552 21 97 162 127 372 132 153 - - - - - - - 2,403 - - - - - - - - - - - 262 448 318 106 182 324 4,686 6,326 $4,000,000 Business finance This facility consists of three individual facilities, namely surrendered bills of lading, trade finance- imports and special documentary import letters of credit. The combined limit of $4,000,000 applies across these individual facilities. As at 30 June 2018, the company has drawn down $2,403,000 (2017: $1,640,000) under its trade finance – imports facility. This facility is a perpetual facility and has no fixed expiry date, although individual trade finance drawdowns under the facility as at balance date mature on the dates disclosed above. The facility is secured by a general security agreement given by Cellnet Group Limited over all existing and future assets and undertakings. Page 51 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements Notes to the financial statements 17. Current liabilities - interest bearing loans and borrowings continued $6,000,000 Invoice finance 19. Contributed equity and reserves This is a facility for terms of trade. The total limit of the facility is $6,000,000. As at 30 June 2018, $nil was outstanding under this facility (2017: $4,686,000). The facility is secured by general security agreement given by Cellnet Group Limited over all existing and future assets and undertakings, and a flawed asset agreement providing for deposits by Cellnet Group Limited in relation to a deposit account held with the financier. Amounts owing under the facility are matched to the trade terms of the underlying financed transaction up to a maximum of 60 days. 2018 2017 No. of shares No. of shares (a) Share capital Ordinary shares on issue at 1 July 52,301,977 51,945,977 Shares issued - exercise of options Shares issued - exercise of performance rights Ordinary shares on issue at 30 June 2,000,000 - 2,813,667 356,000 57,115,644 52,301,977 18. Derivative Financial Instruments Fully paid ordinary shares carry one vote per share and carry the right to receive a dividend. Current Forward foreign currency exchange contracts 2018 $000 38 38 2017 $000 (239) (239) The consolidated entity fair values forward foreign currency exchange contracts held at balance date. Changes in the fair value of forward foreign currency exchange contracts that economically hedge monetary assets and liabilities in foreign currencies are recognised in profit or loss. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of materials, packaging and consumables used expenditure in the statement of comprehensive income, and are included in foreign currency gains or losses disclosed in note 7. 2018 $000 2017 $000 Share capital at 1 July 30,953 30,953 Shares issued - exercise of options Shares issued - exercise of performance rights 500 - - - Share capital at 30 June 31,453 30,953 (b) Reserves Translation reserve Reserve for own shares Reserve for profit Share based payment reserve (406) (25) 9,519 1,713 10,801 (44) (25) 4,226 1,631 5,788 Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations whose functional currency is different to the presentation currency of the reporting entity. Page 52 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report Reserve for own shares The reserve for own shares represents the cost of shares held by an equity remuneration plan that the consolidated entity is required to include in the financial report. At 30 June 2018 the consolidated entity held 18,209 of the Company’s shares (2017: 18,209). This reserve will be reversed against share capital when the underlying shares are exercised under performance rights. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the consolidated entity’s own equity instruments. Reserve for profit Profits are transferred to the reserve for profits to facilitate future dividend payments in accordance with Australian taxation requirements for dividend payments to be sourced from profits. Share based payment reserve The share based payment reserve is used to recognise the value of equity-settled share based payments to KMP. (c) Capital management When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Management adjusts the capital structure to take advantage of favourable costs of capital or high returns on assets. As the market is constantly changing, management may change the amount of dividends to be paid to shareholders, return capital to shareholders, or issue new shares. Management monitors capital through the capital adequacy ratio (net assets/total assets). The target for the consolidated entity’s capital adequacy ratio is between 40% and 60%. The capital adequacy ratios based on continuing operations at 30 June 2018 and 2017 were as follows: Net assets Total assets Capital adequacy ratio 2018 $000 21,166 29,340 72% 2017 $000 15,653 29,445 53% 20. Share based payments (a) Long term incentive plan - performance rights On 24 October 2014 at the Company’s Annual General Meeting, shareholders approved a performance share rights plan. Under this plan, performance rights are issued to key management personnel. The rights deliver ordinary shares to key management personnel (at no cost to the executive) where the performance hurdle in relation to those performance rights is met. Following the exercise of a Right, the Company must, within such time as the Board determines, issue or allocate to or acquire on market for the person exercising the Right, the number of shares in respect of which the Right has been exercised, credited as fully paid. There were no rights issued under the plan during the year ended 30 June 2018. Page 53 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 20. Share based payments continued Details of performance rights granted during the prior year On 1 August 2016, the Group issued performance rights to key management personnel under the Group’s performance share plan. Details of performance rights issued including the original terms are as follows: Rights granted 500,000 Grant date 1 August 2016 Consideration payable Exercise price Nil $ Nil $ Last exercise date 5pm on the date which is 30 days subsequent to market release of FY19 results Exercise conditions Subject to the Plan Rules, a Performance Right cannot be exercised unless the Board acting reasonably is satisfied that the following conditions have been satisfied: • The employee remains employed by the company • There is no outstanding breach of the terms of engagement with the Company. • No notice of termination of engagement has been either been given by the employee or received by the Company. • All performance hurdles have been met. Performance hurdles 334,000 will vest upon meeting a total shareholder return (TSR) performance hurdle 166,000 will vest upon meeting various profit before tax (PBT) performance hurdles The fair value of the performance rights granted during the year was determined by management using either a binomial pricing model (PBT hurdle) or a trinomial lattice pricing model incorporating a Monte-Carlo simulation (TSR hurdle), depending on the nature of the associated vesting conditions. Market conditions, such as the TSR vesting condition, were factored into the initial valuation of the options through use of a Monte-Carlo simulation which derives a valuation based on a range of possible outcomes. Expected volatility was determined based on historical stock price volatility over a period consistent with the life of the performance rights. The table below summarises the key inputs into the valuation model for each tranche of performance rights granted: Tranche Vesting Condition Vesting Date No. of Rights Exercise Price $ Expected Volatility % Risk Free Rate % Value per Right Tranche 1 Tranche 2 Tranche 3 Tranche 4 PBT PBT PBT TSR 30/06/17 30/06/18 30/06/19 30/06/19 55,333 55,333 55,334 334,000 - - - - 50 50 50 50 1.42 1.42 1.42 1.42 0.200 0.200 0.200 0.066 The share price at the grant date of the performance rights was $0.20. The combined grant date fair value of performance rights issued during the year was $55,114. Page 54 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report Subsequent variations to the terms of performance rights on issue In connection with the proportional takeover offer announced by the Company on 11 November 2016, the Board of Directors resolved, as prescribed under the Company’s performance rights plan, to amend the terms of performance rights on issue. These amendments, which applied from the date the takeover offer was successfully completed (January 2017), removed performance vesting conditions and altered the vesting date of all performance rights on issue. The following table summarises all performance rights on issue at the date of variation, and the revised vesting periods: Tranche Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Tranche 6 Original Vesting Condition Original Vesting Date Revised Vesting Date No. of Rights Exercise Price $ Grant Date Fair Value $ Incremental Fair Value 1 PBT PBT PBT PBT TSR TSR 30/06/17 30/06/17 30/06/18 30/06/19 30/06/17 30/06/19 30/06/17 30/06/17 30/06/18 11/11/18 30/06/17 11/11/18 572,667 55,333 55,333 55,334 1,741,000 334,000 - - - - - - 0.280 0.200 0.200 0.200 0.127 0.066 0.228 0.149 1 Where modifications increase the fair value of the equity instruments granted measured immediately before and after the modification, the group is required to recognise the incremental fair value in employee benefits expense, over the remaining vesting period. The incremental fair value granted is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification. The fair value of those performance rights with a market-based original vesting condition (TSR) at the date the condition was removed was equal to the share price of the Company on that date, being $0.26. Movements in the year The following table illustrates movements in the number of performance rights on issue during the year. Opening balance Granted during the year Forfeited Exercised Outstanding as at 30 June Vested and exercisable 2018 2017 Number of rights Exercise Price $ Number of rights Exercise Price $ 2,813,667 - - 2,813,667 - - - - - - - - 2,669,667 500,000 - (356,000) 2,813,667 286,333 - - - - - - Total share-based payments expenditure of $62,223 (2017: 689,000) was recognised in respect of performance rights during the year. All performance rights were exercised during the year. Page 55 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 20. Share based payments continued (b) Long term incentive plan – Director options The company had options on issue that were granted to previous non-executive directors in 2014. As part of the proportional takeover in January 2017 these options were transferred to some of the current non-executive directors. These options were exercised in October 2017. Movements in Director options on issue during the year are summarised as follows: Opening balance Granted during the year Options lapsed Options exercised Outstanding as at 30 June Vested and exercisable 2018 2017 Number of options Exercise Price $ Number of options Exercise Price $ 2,400,000 - (400,000) (2,000,000) - - 0.250 - 0.250 0.250 - - 2,400,000 0.250 - - - 2,400,000 2,400,000 - - - 0.25 0.25 (c) Long term incentive plan – Director options On 19 October 2017 the Board resolved to issue additional new options to key management personnel under the company’s long-term incentive plan. The terms of the options were agreed with the employees on 29 November 2017 (1,900,000 options) and 17 April 2018 (312,500 options), being the accounting grant dates, however options will not be issued to employees until 1 July 2018. Details of the options issued are as follows: Options granted 1,900,000 and 312,500 Grant date Issue date 29 November 2017 and 17 April 2018 1 July 2018 Consideration payable Nil $ Exercise price $0.28 and $0.375 Last exercise date 5pm Brisbane time on the date which is 12 months subsequent to market release of FY2021 result. Exercise conditions Subject to the Plan Rules, an option cannot be exercised unless the Board acting reasonably is satisfied that the following conditions have been satisfied: • The employee remains employed by the company • There is no outstanding breach of the terms of engagement with the Company. • No notice of termination of engagement has been either been given by the employee or received by the Company. • All performance hurdles have been met. Performance hurdles Options will vest upon meeting various profit before tax performance hurdles over the financial years 2019 to 2021. The fair value of the options granted was determined by management using a binomial pricing model. Expected volatility was determined based on historical stock price volatility over a period consistent with the life of the performance rights. Page 56 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report The table below summarises the key inputs into the valuation model for each tranche of options granted: Tranche Vesting Condition Vesting Date No. of Options Exercise Price $ Expected Volatility % Risk Free Rate % Value per Option $ Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Tranche 6 PBT PBT PBT PBT PBT PBT 30/08/20 30/08/21 30/06/22 30/08/20 30/08/21 30/06/22 554,000 554,000 792,000 91,000 91,000 130,500 0.28 0.28 0.28 0.375 0.375 0.375 50 50 50 50 50 50 1.86 1.98 2.09 2.22 2.22 2.22 0.0835 0.0900 0.0942 0.0931 0.1036 0.1104 An assumed dividend yield of 5% was applied in each of the valuations above. The following table illustrates movements in the number of employee share options on issue during the year: Opening balance Granted during the period Outstanding as at 30 June Vested and exercisable 2018 2017 Number of Options Weighted Average Exercise Price $ Number of Options Exercise Price $ - 2,212,500 2,212,500 - - 0.293 0.293 - - - - - - - - - Page 57 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 21. Commitments and contingencies 23. Related party disclosure Commitments Subsidiaries The consolidated entity has entered into commercial leases on office and warehouse facilities. The leases typically run for a period of 1 to 5 years, with an option to renew the lease after that date. Lease payments generally comprise a base amount plus an incremental contingent rental which is based on movements in the Consumer Price Index. Future minimum rentals payable under non-cancellable operating leases at 30 June 2018 are payable as follows and are inclusive of any revenue received from third parties that are sub leasing premises which the consolidated entity is lessee of the head lease of the associated facility: Less than one year Between one and five years 2018 $000 278 56 334 2017 $000 303 106 409 22. Financial guarantees The consolidated entity has provided financial guarantees in respect of rental leasing arrangements disclosed in Note 21. The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required. Bank guarantees provided 2018 $000 130 2017 $000 45 The consolidated financial statements include the financial statements of Cellnet Group Ltd and the subsidiaries included in the following table: Name Country of incorporation Cellnet Group Ltd (Parent) Australia Cellnet Ltd New Zealand C&C Warehouse (Holdings) Pty Ltd Regadget Pty Ltd OYT Pty Ltd Cellnet Online Pty Ltd Australia Australia Australia Australia 3SIXT Limited Hong Kong % of equity interest 2018 2017 100 100 100 100 100 100 100 100 100 100 100 100 100 100 The following table provides the total amount of transactions which have been entered into with related parties during the twelve month periods ending 30 June 2018 and 30 June 2017. 2018 $000 2017 $000 Wentronic Asia Pacific Interest paid on loans from related parties Services from related parties - - - - Purchases from related parties 11,452 2,171 Repayment of loans from related parties CVC Limited Interest paid on loans from related parties Services from related parties Purchases from related parties Repayment of loans from related parties CVC Managers Pty Limited Interest paid on loans from related parties Services from related parties Purchases from related parties Repayment of loans from related parties - - - - - - - - - - - 53 - - - 61 - - Page 58 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report Entity with ultimate control over the consolidated entity Wentronic Holding Gmbh holds 56.19% (2017: 66.90%) of the ordinary shares in Cellnet Group Limited. Wentronic Asia Pacific is a wholly owned subsidiary of Wentronic Holding Gmbh. CVC Ltd held 58.87% of shares in Cellnet Group Limited of the ordinary shares in Cellnet Group Limited for the period 1 July 2016 to 4 January 2017. Terms and conditions of transactions with related parties The sales to and purchases from related parties are made on terms equivalent to those that prevail in arm’s length transactions. Transactions with entity with ultimate control over the group During the 2018 and 2017 financial years, Cellnet purchased inventory from Wentronic Asia Pacific. During the 2017 financial year a CVC Ltd consultant was engaged on a work placement basis to provide business advice to the group. Also during the 2017 financial year the group paid management fees to CVC Managers Pty Ltd, a wholly owned subsidiary of CVC Ltd, for director related services. Joint venture with entity with ultimate control over the group During the 2018 financial year, the Group and Wentronic Holding Gmbh established a joint venture entity, Wentronic International Pte Ltd, incorporated in Singapore. The Group holds a 49% interest in this entity and the investment is equity accounted for on the Group’s balance sheet. The initial contribution of both shareholders to the joint venture was USD 200,000. Cellnet Group Limited’s share of profit of the joint venture for the period from its incorporation to 30 June 2018 was $9,576. 24. Key management personnel (a) Key management personnel remuneration 2018 $000 Short-term employee benefits 922,846 Post-employment benefits Long term employee benefits 61,560 21,120 2017 $000 996,254 58,670 537,635 Total compensation 1,005,526 1,592,559 25. Subsequent events There were no matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future periods. 26. Parent entity information Current assets Total assets Current liabilities Total liabilities Net assets Issued capital 2018 $000 20,623 26,097 (9,528) (9,528) 16,569 31,453 2017 $000 24,402 26,033 (14,976) (14,999) 11,034 30,953 Retained earnings / (accumulated losses) (25,028) (25,028) Reserve for own shares Reserve for profits Reserve for share based payment (26) 8,457 1,713 (26) 3,504 1,631 Total shareholder’s equity 16,569 11,034 Profit / (loss) of the parent entity after tax Total comprehensive income of the parent entity 5,642 5,642 1,827 1,827 The parent has not issued any guarantees in relation to the debts of its subsidiaries and has no contingent liabilities or contractual obligations as at 30 June 2018 (2017: Nil). Page 59 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Notes to the financial statements 27. Auditors’ remuneration 28. Dividends franking account 2018 $000 2017 $000 Amounts received or due and receivable by the auditors for: Audit or review of the Financial Report of the entity and any other entity in the consolidated entity Pitcher Partners 77,000 77,000 Taxation services in relation to the entity and any other entity in the consolidated entity Pitcher Partners 59,810 136,810 7,250 84,250 Franking credit balance The amount of franking credits available for the subsequent financial year are: Franking account balance as at the end of the financial year at 30% (2017: 30%) 2018 $000 - - 2017 $000 69 69 The above available amounts are based on the balance of the dividend franking account at year end adjusted for: (i) (ii) franking debits that will arise from the refund of the current tax receivable; franking debits that will arise from the payment of dividends recognised as a liability at the year-end; (iii) franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated entity at the year-end; and (iv) franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends proposed after the balance date but not recognised as a liability is to reduce it by $nil (2017: $69,000). In accordance with the tax consolidation legislation, the Company as the head entity in the tax-consolidated entity has also assumed the benefit of $Nil (2017: $Nil) franking credits from its Australian wholly-owned subsidiaries during the year. Page 60 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 29. Cash flow statement reconciliation Reconciliation of net profit after tax to net cash flows from operations: Net profit / (loss) Adjustments for: Depreciation and amortisation Movement in provision for obsolescence Movement in provision for impairment Interest revenue classified as investing cash flow Share based payments expense Share of profits of associates Gain on disposal of property, plant and equipment Changes in assets and liabilities: (Increase) / decrease in trade and other receivables (Increase) / decrease in inventories (Increase) / decrease in deferred tax assets (Decrease) / increase in trade and other payables (Decrease) / increase in provisions (Decrease) / increase in current tax liability Change in other financial instruments Net cash used in operating activities Consolidated 2018 $000 5,982 177 388 13 (3) 82 (10) - 1,745 2,354 (2,919) (1,682) 144 54 (277) 6,048 2017 $000 2,035 164 378 52 (1) 689 - (4) (3,506) (4,653) (83) (357) 54 82 382 (4,768) Page 61 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Directors’ declaration In accordance with a resolution of the Directors of Cellnet Group Limited, I state that: In the opinion of the Directors: a) the financial statements and notes of the company are in accordance with the Corporations Act 2001, including: i) giving a true and fair view of the company’s financial position as at 30 June 2018 and of their performance for the year ended on that date; ii) complying with Australian Accounting Standards and Corporations Regulations 2001; b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 2(a); c) d) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and this declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2018. On behalf of the Board Michael Wendt Chairman Brisbane 17th August 2018 Page 62 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report Independent Auditor’s Report to the Members of Cellnet Group Limited Report on the Financial Report Opinion We have audited the financial report of Cellnet Group Limited (“the Company”) and its controlled entities (“the Group”), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes to the financial statements including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants “the Code” that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Page 63 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Key Audit Matter How our audit addressed the key audit matter Revenue recognition – rebates and incentives Refer to note 2(t) Accounting estimates and judgements Revenue is recognised net of incentives and rebates accrued by the group’s customers based on incentive sales. Rebate and arrangements offered by the group are varied and typically customer specific. Due to the variety of contractual terms with customers, the estimation of incentives and rebates recognised based on sales made during the year is considered to be complex. There is a risk that revenue could be misstated due to the level of management estimation and judgement required in accounting for these arrangements. As such, we considered revenue recognition to be a key audit matter. Our procedures included, amongst others: • Obtaining an understanding of the controls over the recognition of rebates and incentives, and evaluating the design and implementation of those controls; • Evaluating the appropriateness of the group’s revenue recognition accounting policies including compliance of these with AASB 118 Revenue; • Performing substantive analytical review procedures over rebates charged to profit and loss for the period based on underlying contractual or constructive obligations; and • Testing the accuracy of a sample of settled rebates the period based on throughout underlying contractual or constructive obligations; incentives • Reperforming the calculation of period end accruals for outstanding rebates and incentives having regard to contractual arrangements in place, established constructive obligations, sales volumes, and customer claim history. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Page 64 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the [Group] or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. Page 65 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included on pages 8 to 16 of the directors’ report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Cellnet Group Limited for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PITCHER PARTNERS JASON EVANS Partner Brisbane, Queensland 17 August 2018 Page 66 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Financial Report ASX Additional information As at 17 August 2018 Substantial shareholders Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. The number of shares held by substantial shareholders and their associates, as advised in substantial holder notices given to the Company, are set out below: Name Wentronic Holding Gmbh JEJ Group Limited Ordinary share held % of capital held Distribution of equity security holders Category 1 – 1000 1,001 – 5,000 5,001 – 10,000 10,001 – 50,000 50,001 – 100,000 100,001 and over Ordinary share held 32,091,380 6,500,000 No. of holders 92 386 84 81 9 26 Shareholdings 20 largest shareholders Name Wentronic Holding Gmbh JEJ Group Limited Chemical Trustee Ltd Philadelphia Investments Pty Ltd Michael Wendt Mr Alan Sparks CVC Ltd Panic Super TUP Pty Ltd Ms Amaya Margaret Brookman Mr Thien Dinh Nguyen Mr Dave Clark Mr Craig Kingshott Kevin Gilmore Chris Barnes Tony Peck Mariva Investments Dino 246 Pty Ltd Brett Perkins Angueline Capital Pty Limited Top 20 holders All other holders All holders 32,091,380 6,500,000 1,820,000 1,650,274 1,600,000 1,300,000 1,019,892 1,000,000 1,000,000 891,543 660,306 500,000 500,000 400,000 322,708 300,000 200,000 200,000 200,000 150,000 56.19% 11.38% 3.19% 2.89% 2.80% 2.28% 1.79% 1.75% 1.75% 1.56% 1.16% 0.88% 0.88% 0.70% 0.57% 0.53% 0.35% 0.35% 0.35% 0.26% 52,283,395 4,832,249 91.54% 8.46% 57,115,644 100.00% The number of shareholders holding less than a marketable parcel of ordinary shares is 113. Page 67 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 Page left intentionally blank. Page 68 Cellnet Group Limited and its consolidated entities Annual Report 2017–18 ABN 97 010 721 749 Cellnet Group Limited 59-61 Qantas Drive, Eagle Farm, QLD 4009 Australia t: 1300 255 563 www.cellnet.com.au